Britcoin escalates the war between governments and crypto

Benjamin Samuels
Benjamin Samuels
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Since the Bank of England’s announcement a few weeks ago that it would be developing a digital currency quickly nicknamed “Britcoin,” central bank digital currencies, or Govcoins, as they are sometimes known, have been all the rage.

Supposedly, the British government will take on responsibility for the maintenance of a digital payment network—like a subsidized version of PayPal. This will make transactions faster and cheaper, especially for money transfers like those required by large banks.

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Is subsidizing PayPal in the public interest? Is it worth hiking taxes to fund the construction of efficient payment channels between banks? Maybe, maybe not.

But these are not really the questions that concern the Bank of England, or the U.S., with its theorized e-Dollar, or China, with its digital Yuan. The desire for faster, cheaper transactions between banks is not new—neither is the bare-bones blockchain imitation that they plan on using.

What is new, however, are the signs that crypto may be heartier than its critics give it credit for. The Bank of England’s announcement comes after the crypto industry seems to have weathered its fourth major “winter.”

The first, the so-called "Flash Crash," occurred in 2011, two years after the Bitcoin whitepaper. The second was prompted in 2014 by the devastating hack of Mt. Gox, then a major crypto exchange. The third, in 2018, was brought on by signs that tech companies like Google and Facebook were souring on cryptocurrency. Each time, the rebound revealed that commitment to the project of decentralization went a little deeper than imagined. This latest winter extends back to 2021, and centers around governmental efforts at suppression and the prosecution of public figures like Do Kwon and Sam Bankman-Fried.

But this, too, seems on the verge of thaw. The collapse of Kwon's stablecoin Terra and Bankman-Fried's FTX have been mostly shrugged off by the crypto community. The global crypto market cap is back above $1 trillion. And perhaps most importantly, there is revived interest in something called “stealth addresses.”

To understand stealth addresses, it is important to understand that under slightly different circumstances, it’s plausible that governments might have developed blockchain technology for themselves. Why? Because everything that anarchists love about the blockchain—like its public-facing consensus and permanent record—is appealing to totalitarian governments for exactly the opposite reasons. Intelligence that can record every transfer of value as well as every transfer of information is about as perfect as intelligence can possibly be. This is especially true when one imagines the role played by mass transit in cities like Shanghai, where it is not difficult to imagine reconstructing someone’s day by studying where and when they paid their subway fare.

What spurred the Chinese government’s crackdown on Bitcoin mining in 2021 was not fear of the blockchain, but fear of Bitcoin. The prefix “crypto” in “cryptocurrency” refers to the aspirations of anonymity which are built into the design of the blockchain but not fully realized. Since a decentralized blockchain allows users to transact with each other without the approval of a central authority, the users are not beholden to anyone else and are never under compulsion to connect their real-life identity to their virtual address—like we do all the time at airports, while crossing borders, or in government buildings.

 The PayPal app logo seen on a mobile phone in this illustration photo. (Reuters)
The PayPal app logo seen on a mobile phone in this illustration photo. (Reuters)

There are, to be sure, ways of connecting someone’s virtual address to their identity in the real world. More thorough surveillance network or precise monitoring of energy consumption would both do the trick. But these are both extremely cost-intensive, and governments will often simply allow virtual addresses to remain anonymous. As demonstrated by the Canadian government’s approach to punishing truckers who participated in last year’s Freedom Convoy, it is often just as effective to freeze certain online accounts by suggesting that companies that do have definite physical locations—which can be raided or shut down—should refuse to allow virtual accounts to exchange their coins for fiat currency. This works since, courtesy of the public ledger, the location of the blacklisted coins is always common knowledge.

This is a risky strategy for governments to adopt, though. First, it requires playing on Bitcoin’s terms. Second, it spurs developers to improve network anonymity, and in doing so gives rise to exactly the kind of tit-for-tat that the international network of visionary, semi-rabid computer geniuses behind Bitcoin and Ethereum love more than anything else.

The Freedom Convoy fiasco, for example, has shifted the attention of the cryptocurrency community to coin mixers, which re-anonymize blacklisted coins by shuffling them around in a pool with “clean” coins. This move was met by the attempted shutdown of the coin mixer Tornado Cash—which has only resulted in the proliferation of new privacy schemes such as stealth addresses, which as Ethereum Foundation head Vitlaik Buterin pointed out in a recent blog post may well be the next big move in the cat-and-mouse game being played by blockchain developers and world governments. The basic idea of “stealth addresses” is similar to a front in money laundering. If governments can only blacklist accounts that they know possess “dirty” coins, then why not open up a fake account—a front that can receive the coins openly and then secretly pass them on to a real account?

Of course, the tit-for-tat game will not end there. Governments can respond by continuing to up their investments in quantum computing, which will look to render most anonymizing techniques obsolete. And developers will hit back by accelerating research into quantum-resistant algorithms, like cryptographic lattices.

This is ultimately not a game that plays to the strengths of centralized governments. In fact, as China understood early, it’s a game that governments are destined to lose—at least as long as the blockchain remains decentralized, with no way to tie a criminal wallet online to an arrestable criminal in real life.

While neither the Federal Reserve nor the Bank of England have ruled out the possibility of a distributed ledger underlying their digital currency, it seems overwhelmingly likely that they will follow China’s example and centralize both the issuance of new tokens and the approval of new transactions. And it is hard to imagine that they will follow the examples of cryptocurrencies like Bitcoin or Ethereum in encoding a hard cap onto the printing of new tokens. Both of these facts should raise serious questions about the immediate practical usefulness of a CBDC—especially one that, as the Fed has made very clear, is “a means to expand safe payment options, not to reduce or replace them.”

Indeed, while the clear benefits of a digital dollar are very few, the opportunities for government surveillance of users are possibly very many. More than anything else, CBDCs are therefore an attempt to neutralize the technology by creating a focal point for institutional enthusiasm that leans toward digital currencies and away from crypto. A bet is being made about the passion of the people for cryptocurrency over blockchain, or digital technology, or just the new thing—and it’s a lowball bet.

At the same time, the Bank of England’s announcement also suggests a shift in tactics for governments which had previously seemed perfectly willing to continue playing cat-and-mouse. It represents a re-evaluation of the overwhelming advantage that cryptocurrency gives developers when they’re allowed to work on their home turf. It therefore constitutes a gesture of respect toward the sturdiness of the decentralized blockchain, while at the same time it suggests a future in which blockchain technology is polarized between the extremes of anarchy and total control, rather than one in which it can be productively mobilized for social good.

In sum, the arrival of government-backed cryptocurrencies is a significant escalation in the shadow war that has been waged between governments and developers for the past decade, and one that does not seem to point towards compromise.

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